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Are you a Person with Significant Control - and why does it matter?

From April 2016 companies and limited liability partnerships (“LLPs”) (except for publicly traded companies) will be required to create and maintain a register of persons with “significant control” over the company (“PSC Register”) and in due course send that information to Companies House where it will be publically searchable.

What’s the purpose of the new regulations?

The introduction of the statutory PSC Register (together with other measures) manifest the government’s G8 focus on corporate transparency. The new requirements allow information on a company’s legal and beneficial ownership to be public, thereby rendering it more difficult for fraudulent companies to use corporate structures to hide company tax evasion, money laundering and terrorist financing.

Why might this be of interest to office holders and other restructuring professionals?

There is no doubt that the PSC Register will prove to be a useful starting point for office holders, such as administrators and liquidators, looking for directors to report upon and at litigation targets for potential antecedent transactions. Having a readily available, maintained list of management and controlling influences of an insolvent company will be a very useful tool for officeholders when reviewing the conduct of management and events in the lead up to the formal insolvency of a company.

In particular, the register could assist with identifying shadow directors (those in accordance with whose directions or instructions the directors of the company are accustomed to act) and/or de facto directors (any person occupying the position of director, by whatever name called) of a company – labels that are often difficult to apply and the meaning of which is surrounded by a plethora of case law. Being able to identify the real influence in the corporate affairs of the company will assist with insolvency practitioners reporting on directors’ conduct and identifying those “connected” to the company for the purposes of the Insolvency Act 1986.

PSC Registers may also be relevant outside of a formal insolvency context. For instance, for restructuring professionals who work with UK pension schemes, group PSC Registers will be an easy and readily accessible source of information about potential “hidden” targets of the Pension Regulator’s moral hazard powers.

What are the new PSC requirements?

From 6 April 2016, companies and LLPs must create and maintain a register of persons with significant control. From 30 June 2016, companies / LLPs will have an ongoing obligation to send the PSC information annually to Companies House with a confirmation statement (which replaces its annual return). Note that for partnerships, the requirements only apply to LLPs. Private equity, hedge fund and other investment structures which are typically based on limited partnerships (as distinct from LLPs) will not be caught.

Each company / LLP must take reasonable steps to identify its PSCs, with such investigations to be made by notice. Failure by an individual or legal entity to respond to such enquiries will allow a company / LLP to sanction (without a court order) that individual or legal entity e.g. purported transfers of relevant interests will be void, rights attaching to those interests may not be exercised, and sums due on those interests will not be paid other than in a liquidation.

Where a company / LLP has not issued investigative notices, the relevant parties must proactively disclose their interest to the company / LLP. There are criminal penalties for non-compliance with these duties for companies and their officers and the individuals or relevant legal entities concerned.

Who is a person with “significant control” (“PSC”)?

A PSC is, broadly speaking, an individual or entity which:

directly or indirectly holds more than 25% of the nominal share capital; or

directly or indirectly controls more than 25% of the votes at general meetings; or

directly or indirectly is able to control the appointment or removal of a majority of the board; or

actually exercises, or has the right to exercise, significant influence or controlover the company (extending to shadow and potentially de facto directors, as referred to above); or

actually exercises or has the right to exercise significant influence or control over any trust or firm (which is not a legal entity) which has significant control (under one of the four conditions above) over the company.

The legal definition is supplemented by further non-statutory BIS guidance and (currently draft) statutory guidance on the meaning of “significant influence or control”.

Conclusion

Investigating a company / group / LLP’s PSC Register is likely to become a routine due diligence item for restructuring professionals and the Pensions Regulator when looking for potential targets.

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